Jeffrey Roach, PhD, Chief Economist, LPL Financial
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial
Jeffrey Roach, PhD, Chief Economist, LPL Financial
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial
Market Blog Posted by lplresearch
Tuesday, September 28, 2021
The municipal market continues to be a relative bright spot for core fixed income investors. While most of the other “safe” parts of the core fixed income universe have generated negative returns this year, the national muni market is up for the year (through September 24). With state and local governments flush with cash due to better-than-expected tax receipts along with generous amounts of federal aid, many municipalities are in good shape. Moreover, a combination of increased demand due to an expectation of higher individual tax rates and a dearth of new issuance over the summer months have kept muni bond prices largely range bound. Now, there is a question of whether the upcoming infrastructure legislation can provide additional support to the investment-grade municipal market.
“If passed, the infrastructure bill will likely help muni credit fundamentals,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But current valuations likely reflect the slimmed down proposal. As such, we don’t think the legislation, when passed, will be market moving”
In August, the Senate passed a $1 trillion, bipartisan infrastructure proposal that would increase new spending towards transportation and “other infrastructure” initiatives by $550 billion, spread out over five years. Roughly $340 billion would flow to municipal issuers. Importantly, the deal calls for investing $110 billion in roads, bridges and major infrastructure projects and $40 billion for bridge repair, replacement, and rehabilitation. Additionally, the bill would invest $65 billion to rebuild the electric grid and $55 billion to upgrade water infrastructure. The House of Representatives is set to consider the plan this week, with a vote scheduled for Thursday. If passed, the Infrastructure Investment and Jobs Act would mark the largest federal investment in more than 10 years.
Additional federal dollars allocated to transportation, electric utility, and water municipal sectors should be supportive of municipal valuations. However, the significantly slimmed down bill won’t be nearly as supportive to the municipal market as was expected earlier in the year. As such, we’ve seen a slight repricing in muni credit over the past few months. As seen in the LPL Research Chart of the Day, yields on municipal credit bonds, across the credit quality spectrum, have fallen this year but have recently risen. The back-up in yields since August likely represents the significant reduction in infrastructure spending as well as the uncertainty surrounding the timing of the legislation passing. President Biden’s original proposal was for $2.3 trillion so the additional $550 billion in new infrastructure spending has likely already been priced in.
Additionally, complicating the House’s ability to vote on the smaller bipartisan infrastructure plan is the larger $3.5 trillion reconciliation bill that some Democrats want to pass before the infrastructure plan is considered and vice versa. Progressive House Democrats have said they won’t vote on the infrastructure bill until the reconciliation bill passes, and moderate Democrats have said they won’t vote on a reconciliation bill unless the infrastructure bill passes. While we think the infrastructure bill ultimately passes, it’s unlikely going to be a catalyst for lower yields/higher prices but it could be another reason yields remain range bound. Moreover, with the economy continuing to recover and the prospects for higher tax rates, muni investment-grade credit should continue to perform well.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
Economic Blog Posted by lplresearch
Thursday, June 24, 2021
As recent economic data shows, the robust post-COVID recovery has brought about a historic rebound in U.S. manufacturing activity. Pent-up demand and low inventories of capital goods have caused companies to fire up their machines at record levels, and manufacturing supply management professionals have responded with relative delight in recent surveys. Both the IHS Markit and Institute for Supply Management (ISM) Manufacturing Indices have been robust across the board, as new order growth, hiring plans, and the backlog of orders point to better health in the sector. The downside…higher prices, as purchasing managers’ queried in the survey pinpointed high levels of input cost inflation brought about by a broad-based spike in raw materials prices. The latest survey results show the June IHS Markit U.S. Manufacturing PMI at a new all-time high of 62.6, which compares to the Bloomberg consensus estimate of 61.5 and May’s reading of 62.1.
“The demand for goods and the rebound in manufacturing activity have been remarkable as folks seem determined to get on with their lives. We know that U.S. consumers like to spend, and it seems like they are more than willing to make up for lost time.” explained LPL Financial Director of Research Marc Zabicki.
We believe the latest IHS Markit manufacturing readout may foretell a good result for the ISM benchmark’s expected release on July 1. That index series has also been near record levels, although just below its all-time high. The long-term ISM chart paints a fairly good picture of past peaks and troughs and the roller-coaster of activity that can occur in the manufacturing sector. In fact, the recent highs in the two manufacturing indicators we have mentioned have us looking ahead to an eventual deceleration in activity, which could come later this year. This deceleration could be brought about by the ultimate slowing of demand for some of the hottest items of late: automobiles, appliances, and technology devices. This doesn’t mean we are souring on the prospect for economic growth in the U.S….only that peak activity, as we are witnessing now, which is usually followed by an eventual slowdown in demand. We should see some of this become visible via U.S. gross domestic product (GDP) growth that is expected to advance at a slower pace in late 2021 and early 2022.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index data from Bloomberg.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
Market Blog
Index Performance – Week ending 5/8/2020:
S&P 500 Index: 3.50%
Dow Jones Industrial Average: 2.56%
Nasdaq Composite: 6.00%
Equities
US equities exhibited strength this week, as the S&P 500 Index climbed higher and cut year-to-date losses to under 10%. The gains came despite the Friday release of the April jobs report, which showed the unemployment rate rising to a level not previously seen in the post-war economy.
“This recession is unique, but that might not be all bad news,” said LPL Financial Senior Market Strategist Ryan Detrick. “We’ve had to flip a switch on the economy, essentially frontloading an entire recession’s worth of damage into a couple months, creating some all-time dismal data. But that means we’ll eventually be able to flip it back on, supporting a robust recovery.”
The NASDAQ Composite, with its weighting in health care/biotech and technology names, led the market gains. The NASDAQ has so far enjoyed a massive comeback this year, erasing the more than 20% losses experienced during February and March and now sports a positive year-to-date return. Small caps outperformed on the week, but the Russell 2000 remains more than 20% below its February highs.
Growth stocks led value by a wide margin, though the leading sectors were energy and technology, which both gained approximately 6%. This is the third consecutive week of leadership for energy stocks. Utilities lagged and was the only sector lower on the week.